In the shift of fiscal policy in UAE, the government introduced a new corporate tax regime. This landmark decision marks the country’s first initiative into corporate taxation. Also, it aligns with international standards and promotes fiscal sustainability. Moreover, this new framework differentiates businesses operating on the mainland from those established with designed free zones. Free zone entities and qualifying free zone persons are subject to a corporate tax rate of either 0% or 9% within the designated free zone. This depends on their qualifying income. In addition, qualifying income refers to revenue generated from activities within the free zone.
Businesses face many problems with understanding corporate tax. So, let’s look into the most common problems faced by businesses in UAE.
- Complexity of the tax code
- Lack of understanding of tax laws
- Difficulty in preparing tax returns
- Determining taxable income
- Understanding tax credits and deductions
These problems can significantly impact business in UAE. Businesses can overpay the taxes or make errors in their tax filings. So, let’s get into the corporate tax regulations in free zone entities.
Corporate tax in Free Zone entities
A free zone is a defined region within the state that is decided by cabinet decisions made at the minister’s request. There are various free zones in UAE, and most companies register 100% foreign-owned subsidiaries.
Most free zone entities in the UAE have been considered great motives for international trade. Moreover, free zones enjoy 100% foreign ownership, VAT exemptions, and 100% customs. And 100% returns on profits and capital. Importantly, free zone entities enjoy corporate tax exemptions.
Tax rates in free zones
The tax rates for free zone businesses and qualifying free zone persons depend on the nature of their qualifying income. Qualifying income is generated from activities conducted entirely within the free zones. Also, free zone businesses meet specific regulatory requirements.
Tax rates are as follows in free zones:
Qualifying income that meets specific criteria avail 0% tax rate. The criteria can be derived from export-oriented activities or catering to the international market.
Qualifying income that does not meet the set criteria gets the 0% tax rate in free zones.
Exemptions:
In addition, there is no tax on interests, dividends, and royalties in qualifying free zone and free zone businesses.
Economic substance regulations (ESR)
Free zone businesses and qualifying free zone persons must comply with the Economic Substance Regulations (ESR). These regulations require that companies have a substantial economic presence in the Free Zone. Moreover, they should have a physical office, incur reasonable operating expenses, and employ qualified staff.
Corporate tax rates for free zones:
- All companies other than free zone entities
- Nil for taxable income up to AED 375,000.
- 9% on taxable income exceeding AED 375,000.
- Free zone entities
- Nill on Qualifying Income.
- 9% on non-qualifying income.
Conditions for Qualifying Free Zone Person in UAE
If you want to qualify for Free Zone Person in UAE, the company needs to meet the following criteria:
Establishment in a Designated Free Zone
The company should have a physical presence within a Designated Free Zone in the UAE. Moreover, designated free zones are specific areas within the UAE. Also, these have been granted special economic privileges like tax exemptions and relaxed regulations.
Substantial Economic Presence
The company should demonstrate a substantial economic presence within the designated free zone. Also, this includes maintaining employee-qualified personnel, physical office, and incurring reasonable operating expenses. Moreover, the company must engage in core business activities within the free zone. For example, processing, manufacturing, or distributing goods or services.
Derivation of Qualifying Income
The company must derive qualifying income. Moreover, qualifying income is income generated from activities conducted completely within the designated free zone. Also, meeting specific regulatory requirements. The qualifying activities include these:
- Activities catering to international markets.
- Export-oriented activities.
- Activities that promote economic development within the designated free zone.
- Compliance with Economic Substance Regulations (ESR)
Also, the company must not have elected to be subject to the UAE’s standard corporate tax rate. Moreover, this means that the company must have chosen to be classified as a QFZP. Also, benefits from the preferential tax treatment associated with this status.
Conclusion
In this blog, we learned about corporate tax in free zone areas. It is crucial for businesses to be aware of the tax regulations. ebs is a leading accounting and bookkeeping firm in UAE. We provide a comprehensive range of corporate tax services to help businesses understand the corporate tax regime. Here’s how our team of professionals can assist businesses in navigating the corporate tax landscape:
Corporate tax advisory
ebs team of tax experts provides tailored advice on corporate tax planning. Also, we provide tax compliance and tax optimization strategies. We can help businesses assess their tax liabilities and identify tax exemptions and deductions.
Corporate tax compliance
ebs ensure that businesses meet all corporate tax compliance requirements. Also, it includes tax registration, tax return preparation, and timely tax payments. We assist businesses in maintaining accurate tax records and managing tax disputes and assessments.
Corporate tax representation
ebs represents businesses in their interactions with the FTA. We can provide guidance on tax inquiries, assist in resolving tax disputes, and represent businesses in tax appeals.
On the other hand, we provide other services such as accounting and bookkeeping services, Auditing, Due Diligence audit services, and many others. So, you must get in touch with our experts to discuss more about our services and contact us today.
FAQ’s
What is the corporate tax rate in the UAE?
The corporate tax rate in the UAE is a standard 9% for taxable income exceeding AED 375,000. Also, taxable income refers to the gross income of a business minus allowable deductions.
Who is subject to corporate tax in UAE?
Corporate tax in UAE applies to the following taxable persons:
- UAE companies and juridical persons.
- Natural persons
- Non-resident juridical persons
Do businesses operating in UAE Free Zones have to pay corporate tax?
The corporate tax treatment for businesses operating in UAE free zone depends on the nature of their income and whether they meet the criteria for qualifying for free zone person status.
Qualifying Income (QI): Income generated entirely within the Free Zone and meeting specific regulatory requirements, such as export-oriented activities or catering to international markets.
Qualifying Free Zone Person (QFZP): A legal entity established in a Designated Free Zone and meeting specific criteria, including deriving QI, maintaining a substantial economic presence in the Free Zone, and complying with Economic Substance Regulations (ESR).